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The Unenforceable Mandate

I hadn’t intended to write anything about health insurance reform, in large part because the debate has become so utterly poisonous, but also in part because I felt that the important issues have been adequately dealt with elsewhere. Well, there’s something that isn’t really being discussed and should be, because it cuts to the heart of how health insurance works, and may be the hinge upon which the PPACA (Patient Protection and Affordable Care Act) succeeds or fails. One would think that that would be discussed all over the place, but it’s not, neither in the liberal press (which I read) nor in the conservative press (which I also read.) In fact, so little has the issue been mentioned anywhere that I’ve begun to think I’m missing something crucial.

So let me begin by reiterating what most people know or should know: Health insurance is a really lousy business. Profit levels in health insurance run from 2.5% to 5%, depending on who you’re talking about and whose numbers you believe. Insurers are not making a lot of money, and what they do make they make only by doing everything in their power to exclude the people who need health insurance the most. Google “recission” and “purging” (sometimes called “reunderwriting”) in a health insurance context if you don’t believe me. Many people (including me) consider such practices tantamount to fraud, but that’s not the point I want to make. The point is that even while making full use of recission and reunderwriting, the health insurers are earning maybe 3% profits on average.

Like I said, a lousy business.

So. Enter health care reform. Insurance companies will be required to take (and keep) all comers, irrespective of pre-existing conditions. That’s called “guaranteed issue.” To make it work, all people will be required to buy health insurance, including people who choose not to buy it today, typically because they’re young and healthy. This requirement to buy insurance is the “individual mandate.” The individual mandate enlarges the pool of the insured and thus the amount of money available to pay claims. Without the individual mandate, people would buy insurance only when they needed it, which really isn’t “insurance” in any honest sense of the word. The pool of funds to pay claims would shrink, and claims would explode. The insurers would be gone like that.

Basically, the price of guaranteed issue is the individual mandate. You can’t have the first without the second. I think this is well-understood and not controversial at all. The devil, as usual, is in the fine print. In the bill as passed, people who choose not to buy health insurance will be required to pay a minimum fine of $695 in any given year, or 2.5% of their income, whichever is greater. Those fined would still be able to get insurance when they needed it under the provisions of guaranteed issue. This in itself is a problem, because the cost of insurance is likely to be much higher than 2.5% of income for a huge number of people. 2.5% of a $100,000 annual salary is $2500–dare ya to find a policy for that. A guy making $100K could just pay the $2500 and buy a guaranteed-issue $7000/year policy as soon as the bad lab tests came back, thus saving $4500/year without any downside for all the years that he stays healthy, and pushing that saved cost onto the insured.

I think this is dangerous. It’s not being talked about enough, but it’s being talked about a little, in a few relatively large publications. However, it’s not why I’m writing this entry.

A few weeks ago, I read an article by Timothy Noah in Slate about this very issue. Noah’s thrust was elsewhere, but my jaw dropped when I read Noah quoting from the health care reform bill itself. I clicked through to the monster PDF text of the final bill as passed, to verify what he had said. I blinked. I rubbed my eyes. I got up and went to the fridge for some diet ginger ale. I came back, and it was still there:

In the case of any failure by a taxpayer to timely pay any penalty imposed by this section, such taxpayer shall not be subject to any criminal prosecution or penalty with respect to such failure.

This from page 336 of the bill as it was passed. On the same page, there is a provision that the government may not

(i) file notice of lien with respect to any property of a taxpayer by reason of any failure to pay the penalty imposed by this section, or (ii) levy on any such property with respect to such failure.

Read those quotes again. The bill outlaws its own enforcement. If you refuse to buy insurance and refuse to pay the fine for not buying insurance…nothing happens. The individual mandate is thus unenforceable, but you can lay odds that guaranteed issue will be mercilessly enforced against the insurance companies. I’m sure there’s some legal interpretation to be done here, but Noah’s point is that there is considerable temptation for mass civil disobedience on the individual mandate without any downside for those disobeying. What he doesn’t say is that such mass civil disobedience could lead to the collapse of the private health insurance industry.

Others in the blogosphere have begun to notice this in the last few days. But why hasn’t it shown up in the major media? You’d think the Wall Street Journal would be screaming about it in every other issue. Didn’t anybody actually read the bill?

Don’t answer that.


  1. David Stafford says:

    There is nothing surprising in this. It is how divisive bills are designed. If the fine equalled the cost of insurance and the penalty was enforced then resistance would have been stronger and it is less likely the bill would have passed.

    Lawmakers understand this very well. They know that they can and will change it in the future. There will be talk of ‘abuse’ and ‘loopholes that must be closed.’ You can be certain of it.

    This is one pattern and there are many others. Where is the ‘Design Patterns’ book for law? (Besides ‘The Prince’, of course.)

  2. Evan says:

    This is true, but forcing young people in to work even harder as slaves to the old is a terrible thing in and of itself. They are going to be required to pay for and subsidize the old. Why is that something that is good for society? Why is that something that is fair?

    If all you can object to is that people are not being forced harshly enough to buy insurance then there is no morality behind your appeal to save the insurance companies.

    It is not any more immoral to force insurance companies to cover people regardless of risk than it is to force young people to pay insurance rates far above their actual risk.

    Both are bad things but it isn’t extremely unlikely that congress will come up with an emergency fix to please their actual constituents (you know, the people who give them massive contributions).

    I wouldn’t worry too much about this issue, because it is highly likely that if the insurance companies are going out of business, bought politicians on both sides of the aisle will ‘save’ them by forcing young people to ‘take responsibility’ for health costs they haven’t incurred and risks they do not posess.

    If you are actually making a moral argument that it is unfair to put ridiculous demands on the insurance companies than the whole bill should be demolished, but I don’t think that is how you intend to fix it.

    1. Alas, I haven’t decided how I would fix it yet–I freely admit that I don’t have any brilliant ideas. Or the problem may be unfixable, at least without a great deal of bitching and moaning and lawsuiting. I’m merely pointing out that, absent enforcement of the individual mandate, we may lose the insurance industry before we have anything to replace it with.

  3. atlas shrugged says:

    if you check out, you will find that the unenforceable mandate will be a means to bury the insurance companies with the responsibility of covering all the costs thus causing a collapse of the private insurance and have everyone looking to the government to take over and make it a single payer- which is what the liberal left wanted in the first place. Remember the sound bite from Obama, stating that he would get to a single payer it would just take 5-10 years and this is exactly how he plans to do…..very similar to the Freddie and Fannie Mae mess. In the housing industry about 10 or so years ago, Obama was one of the lawyers that pressed the financial industry to finance all who came looking for a home. Then the collapse happened and look who has taken over the banking industry.

  4. Erbo says:

    All I can say is: Read Karl Denninger. And especially his series of posts on health reform. And especially this post on a strategy to “arbitrage” the health care reform law, following the guidelines you mention above. Basically, by just paying the fine and only buying the insurance when you need it, your only major risk is a “zero notice” catastrophe that wouldn’t give you time to buy the insurance…but, by banking the money you save by not buying the insurance in the first place, you could have a nice cushion against that possibility within a year or so.

    He fully expects that people will do this. And that the health insurance companies will be bankrupted as a result. (Denninger pulls no punches. He skewers both Dems and GOP as the situation calls for, and his opinions are based on hard facts, business experience, common sense, and the laws of mathematics. You can’t cheat mathematics, he says, and, ultimately, “the market calls all bets.”)

    Incidentally, the fact that the health-care fine enforcement seems to be self-denying may be immaterial. Since the IRS is administering that piece of the puzzle, they may just auto-deduct the fine from your income tax refund each year…or, if you have to pay, applying those payments to your health-insurance fine first, and then nailing you to the wall for not paying your taxes. But, while it’s plausible, that’s sheer speculation at this point, since that part of the program won’t even go into effect for another four years.

    Elsewhere, Denninger actually outlined a five-point program that would control costs, end the real issues behind the health care price explosion (namely cost-shifting and cost-hiding), and would not cost taxpayers one nickel. The fact that Obama and the Dems rammed through this 2000-page monstrosity, instead of something simple like Denninger’s plan, suggests that (a) the entrenched interests in health care got their money’s worth (remember the definition of an honest politician: “Once he’s bought, he stays bought”), and/or (b) the goal of this measure is not actually to “reform health care.” The real goal may be to force the insurance companies out of business so the only option left is a government-run single-payer system, ala Canada, Europe, etc. Or it may be to raise more revenue for the Democrats’ other social-engineering goals, or for more giveaways and bailouts. Or…well, who knows?

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  6. Peter G. says:

    I thought this was fairly obvious– at least to people willing to think about the situation. Various conservative commentators have been making this point for months, though perhaps less clearly than they should have.

    As I’ve been saying, if a policy must be issued in spite of pre-existing conditions, whatever it is, it isn’t “insurance” any more. This just isn’t what that word means. It’s something more like flat-rate pre-payment for medical care with an involuntary private subsidy.

    It’s also worth pointing out that this is _exactly_ what the Community Reinvestment Act did to the mortgage industry, which is the true first cause of the recent banking crisis. Under the CRA, banks were required to issue home loans for people with pre-existing conditions that would otherwise disqualify them for a mortgage– that is, poverty.

    I don’t, however, believe that the insurance companies will collapse any time soon. I expect they will go through roughly the same process the banking industry did. They will raise rates overall, which I believe is not prohibited under the current law. They will reduce annual coverage limits, which is allowed through 2014.

    In 2014, there will be new “insurance exchanges,” which seem to be little more than the Obama administration’s attempt to reinvent the creative risk-spreading methods that the banks developed to disguise bad loans as high-risk, high-return investments.

    Whatever honest insurance-industry executives are left will be driven out and replaced by others more willing to suck up to the Democratic Party leadership. Political deals will become the most effective way for these companies to improve their profitability, rather than innovation or efficiency.

    And even when all these cheats fail and health-insurance companies reach their own financial breaking points, there will be government bailouts.

    Congress will do whatever it can to avoid creating the impression that Obamacare destroyed the insurance industry. When we get a single-payer system, it will be presented as the solution to a failure of private enterprise. It will be said that insurance companies were simply unwilling to cooperate, too greedy to give their customers the coverage they needed.

    But I think that point is ten to twenty years away.

  7. Brook Monroe says:

    Well, let’s be careful here–it says “criminal” penalties. It doesn’t appear to void the possibility of civil penalties. (Parking tickets and low-speed moving violations, and the like, are civil, not criminal penalties. This is why illegal aliens are not criminals, because being here without proper documentation is a civil, not criminal, infraction.)

    I don’t see that the bill forbids civil fines and penalties–just criminal.

    1. True on the surface of it, but the verbiage in the bill is an invitation to a tsunami of litigation from people claiming that the spirit of the law is to forbid the IRS from doing anything in the line of enforcement. Legal challenges are going to make this thing a nightmare for years to come, and I doubt that anyone will see any benefit from the bill for five or six years, if that. Many of the uninsured will die in the meantime, or go bankrupt. A bad bill like this one may well have been worse than no bill at all.

  8. Chris says:

    It might seem, given the above quoted, more frightening portions of the bill, and given the assumption that someone who was a democrat actually read and understood the whole thing, that the intention was and always has been, to eliminate the private health insurance industry. Does this really come as a surprise? If we think back, actually listen to our current commander and chief’s early rhetoric, I don’t believe this should come as a surprise. A key phrase now puts me on the alert like nothing else and here it is…”well I think the guy who earns $250,000 a year or more should spread it around.” Ladies and gentlemen, I give you our president and congress, the spreaders of American wealth.

  9. Woody S. says:

    Jeff – what do you and Carol do for health insurance now? If you buy a policy yourselves, how has that experience been pre-reform?

    1. It’s ugly. Both of us are trim, lifetime nonsmokers in almost perfect health, and (largely because of bad laws tilted against the self-employed in Colorado) pay $15,000 per year for a family policy. That’s more than we pay for food, housing, and gasoline put together. The sad part is, $15,000 per year may simply be what a family policy costs, which most people can’t see because their employers pay for much or most of it. Our dealings with the insurance company have been uneventful, because we haven’t had much in the line of claims. That doesn’t mean I trust them, as they could dump us at any time on a technicality.

      1. Woody S. says:

        Seems like then, Jeff, the new health care laws may have some good things in it for you, regardless of any philosophical issues with government intervention/mandates in a free market system.

        That is, after all, the whole idea of the thing.

        1. It’s easy to mistake my position on this whole business: We desperately need reform in the health insurance world, but this bill may be fatally flawed. I am slave to no political party nor any ideology. All I want is a system that works. I’m worried about loopholes and failure to address issues like tort reform and funding, as well as hidden pork and perks. I’m extremely suspicious of the fact that the bill takes effect years from now, and not the moment it was signed. It all just smells to high heaven.

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